UnitedHealth Group - Earnings Call - Q4 2011

Transcript

Speaker 6

Good morning. I will be your conference facilitator today. Welcome to the UnitedHealth Group's fourth quarter and full year 2011 earnings conference call. A question and answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here is some important introductory information. This call contains forward-looking statements under U.S. federal security laws. These statements are subject to risk and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risk and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on the financial reports and SEC filings section of the company's investors page at www.unitedhealthgroup.com.

Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated January 19, 2012, which may be accessed from the investors page of the company's website. I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Speaker 3

Good morning, and thank you for joining us as we wrap up 2011 and discuss the potential we see to better serve our customers and markets in 2012. We are committed to continuing to elevate our performance this year, as we outlined at our investor conference just about a month ago. 2011 was a strong year across a wide range of performance factors. Continued focus on fundamental execution improved service and value for our customers. Financial performance was driven by revenue growth across all of our businesses, including from new business relationships and strong retention of our established clients. Relentless cost management and continued business simplification were prevailing themes in 2011, and innovation and development activities for new markets advanced steadily throughout the year as we strengthen key capabilities to respond to emerging growth opportunities.

For many years now, we have focused on the combination of fundamental execution and practical innovation to yield value and performance from our assets for the benefit of those we serve. We concentrate our efforts on two market-facing business platforms: UnitedHealthcare for health benefits and Optum for health services. Both leverage our common competencies. This enterprise-wide focus has enabled us to steadily advance year after year, compounding our gains over time. Today, UnitedHealth Group is more capable and considerably more nimble than just five years ago. This enables us to better respond to the pace of change required to lead in serving the core needs of the healthcare market. Our commitment remains for this enterprise to adapt and grow at a market-leading pace and deliver consistently superior performance to customers.

We will begin with some 2011 highlights and then turn to a more detailed review of UnitedHealthcare and Optum's recent progress and growth. UnitedHealth Group earned $4.73 per share in 2011, an improvement of 15% year over year. Cash flows from operations of $7 billion were once again more than 1.3 times full-year net earnings. Revenues approached $102 billion, up nearly $8 billion from 2010. Full-year revenues grew 8%, with revenues growing 7% at UnitedHealthcare and increasing by 21% for the Optum businesses. The 2011 operating margin of 8.3% was stronger than we originally expected and close to the level achieved in 2010. Our 2011 operating cost ratio increased 10 bps to 15.3% due to an overall increase in regulatory readiness and compliance costs and to the rapidly growing level of fee-based and service revenues.

Fourth quarter adjusted operating cash flows of $2 billion brought full-year cash flows from operations to $7 billion and increased to $700 million, or 11% over 2010. Total dividends paid increased 45% year over year in 2011, and we repurchased $3 billion in shares, $500 million more than the upper end of our plan for the year. We completed a fourth quarter debt offering at the lowest net interest rates in the history of our company, and we ended the year with a ratio of debt to debt plus equity of 29%, a 1 percentage point reduction from 2010. At year end, we held a strong available cash position of $1.6 billion. Let's review how these results were driven by our complementary business platforms. UnitedHealthcare's growth performance has been distinctive in the marketplace.

Over the past two years, we have grown to serve 2.6 million more people, with at least six-figure advances in individuals served in every product category over that time. Fee-based commercial actually saw a seven-figure growth. Fourth quarter 2011 growth was well-balanced, with increases of 70,000 people served for employer and individual, 40,000 people for UnitedHealthcare Community & State, 65,000 people for UnitedHealthcare Medicare & Retirement, and 25,000 people in standalone Part D. For full year 2011, the employer and individual business grew by nearly 1.1 million people, with gains in risk-based products of 145,000 people and fee-based offerings of 915,000. 2011 was the best UnitedHealthcare Commercial growth performance in a decade. Our results reflect our emphasis on newer, more affordable products, consumer-friendly innovation, and stronger local market relationships and engagement with the people we serve.

Consumer engagement is central to our health benefits value proposition because improving patients' decisions, whether related to lifestyle or access to care, is critical to their total health. One effective tool for engaging consumers is aligning financial incentives with healthy actions. Our UnitedHealth Personal Rewards program offers consumers incentives, such as a reduction in their premiums for completing biometric screening, participating in education programs when needed, and demonstrating compliance with care programs. Since its introduction in 2010, both new and existing customers have embraced this distinctive benefit offering, and we now serve nearly 1 million people in Personal Rewards incentive designs. This has been one of the most successful commercial product launches in the history of UnitedHealthcare. Another key component to consumer engagement comes from the power of consumer information.

The emerging intersection of consumer health information and enabling technology makes it possible for people to more easily take greater control of their health. Last week, UnitedHealthcare and Optum exhibited at the Consumer Electronics Show in Las Vegas. They demonstrated nearly a dozen innovations ranging from fitness gaming to $45 telehealth doctor appointments, to a new portfolio of health applications for mobile phones and tablets, to a highly personalized treatment cost estimator. These are innovations that empower consumers with better, more accessible information and help them improve their health and well-being. 2012 is off to a solid start in employer and individual, with fee-based growth tracking favorable to plan and risk-based performance on plan. As we discussed at the investor conference, we project risk-based membership to decrease in January, followed by improvement over the balance of the year.

The majority of the January 2012 decrease is due to the loss of one public sector client and two public sector funding conversions to our fee-based products. Client retention appears stronger this January than last year for both risk-based and fee-based products. In Medicare and Retirement, Medicare Advantage finished the year with growth of 25,000 seniors in the fourth quarter, bringing the full-year increase to 170,000. Our net new January Medicare Advantage growth will position us to achieve the 250,000 to 300,000 2012 growth we targeted at our investor conference outlook prior to the pending Excel Health acquisition. Excel Health is moving through the regulatory approval process and should close on schedule in the first half of 2012. In Part D standalone, we added another 25,000 members in the fourth quarter to close with growth of 325,000 in 2011.

As you know, the low-income market benchmark priced below our bids for 2012. We estimate that we entered January down approximately 625,000 people on a net basis. We believe we will grow from this level over the balance of the year in the open retail market, which provides more favorable returns. Due to the slow start, year-end 2012 membership for Part D may be lower than our initial expectations from November. Medicare supplement continues to deliver consistent and dependable growth performance, which we expect to repeat in 2012. Supplemental products provide an important balance of offering, serving the needs of seniors, both individuals and groups. In Community & State, our Medicaid business grew by 40,000 people in the fourth quarter, bringing full-year growth to 205,000 through a combination of new business awards, program expansions, and market share growth.

We expect 2012 growth above 2011's strong results as more of our nation's Medicaid population move into coordinated care programs and the eligibility for Medicaid begins to expand in 2014. In that vein, we're honored to learn earlier this week that we qualified as a successful bidder for the state of Washington's managed Medicaid expansion. Longer term, the intersection of Medicaid and Medicare for so-called dual-eligible members is gaining greater attention from policymakers. The combination of Excel Health with our organization's existing depth of experience in serving the needs of dual eligibles further strengthens our capabilities in this area and positions us well to help meet the growing demands of this market segment. Our full-year consolidated medical care ratio of 80.8% increased 20 basis points from last year, with the fourth quarter increasing 10 basis points year over year. Reserve development was not significantly different between years.

In the full year, UnitedHealthcare medical care ratio of 80.9% was 30 basis points better than our estimate at our investor conference. Overall, the rate of increase in use of the medical delivery system remains moderate across our benefits businesses. By far, unit costs continue to be the most significant trend driver, particularly in inpatient settings. As we previously reported to you, we generally saw evidence of increasing utilization in the second half of 2011, especially as compared to the third and fourth quarters of 2010, when utilization trends were essentially flat. This was most prominent in outpatient and physician office settings. We expect higher utilization trends to continue steadily throughout 2012. To summarize, UnitedHealthcare's diversified top-line growth continues to be the central story for our health benefits businesses.

UnitedHealthcare earnings from operations of $7.2 billion increased 7% year over year, driven by revenue growth of 7% and productivity gains in operations, partially offset by the impact of new premium rebate obligations. Optum, our health services business platform, produced strong growth in 2011, with revenues up 21% to $28.7 billion. Total earnings were just over $1.25 billion. Fourth quarter earnings from operations were $279 million, with operating earnings at each business unit slightly outperforming our most recent expectation. To touch briefly on each of Optum's businesses, Optum Health's revenues exceeded $6.7 billion in 2011, a year characterized by gains in capabilities and growth in a wide range of markets. Optum Health services will become even more valuable to the medical delivery system as care providers increasingly share in the financial responsibility for managing health and healthcare costs for broad groups of their patients.

Optum Health is expert in two key areas for improving both health outcomes and costs: one, consumer engagement and decision-making, including selecting the highest quality venue for care; and two, provider engagement related to the alignment of benefit designs and the consistent use of high-quality and resource-efficient evidence-based care practices. Optum Health delivered services to 2 million more unique individuals in the past year. Optum Health now serves approximately 60 million people. This includes 700,000 patients through its collaborative care medical delivery network. More than 40% of these patients have a payer other than UnitedHealthcare, illustrating both the reach and neutrality of this business. Optum Health financial services continues to grow. It added another 260,000 consumer accounts and increased customer assets under management by $350 million, or 31% in 2011.

Optum Health's earnings from operations of $423 million decreased year over year, as we fully expected when we realigned this business at the beginning of 2011. From that re-based starting point, Optum Health has exceeded our performance expectations. The full-year operating margin of 6.3% also met expectations, and we fully expect to steadily improve this performance as it grows, more fully integrates, and matures. Optum Insight revenues of $2.7 billion increased 14% year over year. Optum Insight had strong sales performance in 2011 and enters 2012 with significant momentum across the business. Adjusting for the divestiture of the clinical trials business, Optum Insight's sales bookings grew 27%, and contract revenue backlog increased a similar 26% on a comparable basis to $4 billion. The number of clients willing to recommend Optum Insight doubled over the past year.

We provided compliance services to more than 600 new hospital customers, and we are in discussions with dozens of organizations about services related to their formation of accountable care disciplines. Optum Insight's earnings from operations increased 34% on an adjusted basis to $381 million. The full-year operating margin of 14.3% improved significantly, and we expect strong margin and earnings gains in 2012 as well. Optum Rx grew revenues by 15% to $19.3 billion in 2011. This revenue growth was driven by an increase of 2 million people served and the growing mix of higher revenue specialty pharmaceuticals. Optum Rx earnings from operations of $457 million decreased 14% in 2011, due in part to investments to support future growth. These included technology to support its expanded service to the UnitedHealthcare Commercial business, as well as the related implementation of a new, more flexible mail processing system.

For the overall Optum platform, we outperformed in 2011 due to strong sales growth, contributions from new businesses, and more consistent, disciplined operating performance in a word execution. We expect 2012 to be a stronger performance year, as well as a building year, with accelerating performance in 2013 and 2014. This period will be defined by organic growth driven by increasing customer demand for our technology and services offerings, operating margin advances, and the benefits of our insourcing the remaining portion of UnitedHealthcare's Commercial pharmacy benefit management (PBM) services. What we hope you are sensing is that UnitedHealthcare and Optum are distinct yet powerfully complementary business platforms. UnitedHealthcare brings scale and market innovation pressure to Optum while leveraging Optum's distinctive capabilities. We share common relationships enterprise-wide, from regulators to care providers, the government, and other benefits sponsors and pharma, both as customer and as supplier.

The work we do across both of these platforms can serve to deepen the value delivered and the quality of those relationships. This breadth of engagement is critical to our distinctive market presence, our brands, and our strengthening reputation. No one on the services side of healthcare has established comparable market scope and presence. Through the capabilities of UnitedHealthcare and Optum, we have emerged as a market leader in the essential competence of care management, operating in more venues than others and with better integrated data, technology, and outcomes. Our technology is emerging as a distinct enabler and operating advantage. Optum will take responsibility for externally marketing our enterprise technology in 2012 as we look to further externalize the cloud-based assets we've been developing.

When taken in concert with our mobile health applications and the operation of roughly 2,500 dedicated healthcare internet portals, you can begin to appreciate the scope and potential we bring to clients in the market overall. That technology is fed by distinctive data and analytical applications and skills. UnitedHealthcare is one of the most prolific health data producers in the country. Optum is expert at translating data into information that can be used to analyze costs and performance, compare clinical effectiveness, execute predictive modeling, and provide decision-making information to consumers, care providers, other payers, and the government. Our cultural embrace of innovation as a discipline engages both UnitedHealthcare and Optum. UnitedHealthcare ideas help drive the innovation dynamic to which Optum must respond. UnitedHealthcare is an ideal market platform that executes well, quickly feeds back change to further innovate a uniquely efficient and iterative real market dynamic.

No one in health benefits can offer Optum the scale that UnitedHealthcare does. In turn, UnitedHealthcare's growth of 2.6 million people over the past two years is both a product of Optum's distinctive services and a top-line driver for Optum's results as well. We make these capabilities and scale advantages available to others, not just for products branded UnitedHealthcare. Today, we serve thousands of parties across the health system. In the end, this complementary alignment from health benefits to health services allows us to deploy capital and grow across a wider range of critical healthcare markets in virtually every geography and within a range of regulatory structures from heavily to lightly regulated businesses. In summary, 2011 was a positive year for our businesses across many dimensions, but 2011 ended three weeks ago. For 2012, we are rededicating ourselves to fundamental execution.

For us, that starts with serving others, a commitment to service excellence, managing healthcare costs, disciplined operating cost management, practical and productive innovation, developing and rotating leaders to strengthen our business platforms and the executives themselves, deepening external relationships, and building new relationships and new business for 2013. These are the basic disciplines of our businesses. They have served us well, and we expect to continue to bore you with them. At this early stage, we continue to take an appropriately cautious posture on 2012 financial performance. Our fourth quarter results were above our expectations, but they do not alter our view of 2012. Initial growth results are basically in line with the plan we communicated at our November investor conference.

We continue to plan to invest a total of nearly $400 million through the income statement for reform readiness and compliance and preparations to insource pharmacy benefit management (PBM) services. We expect steadily increasing medical system utilization over the course of the year. Commercial premium and government program reimbursements will continue to be under pressure in health benefits, and we have no assumption of reserve development. If it were to occur in the commercial segment, it would be fully subject to rebate calculations. We expect 2012 to challenge us to be at our best to achieve this plan, which targets net earnings per share in a range of $4.55 to $4.75 per share, with $6 billion to $6.4 billion in cash flows. You should be aware that the first quarter presents a challenging year-over-year earnings comparison.

Our plans included sequentially lower first quarter than we reported today for fourth quarter 2011, but as always, we are committed to delivering our best performance. One of our investors recently observed that at the current rate, UnitedHealth Group's business will produce cash flows from operations over the next five years, totaling roughly 60% of our market cap. We intend to grow and to produce more than that, and we will continue to be thoughtful stewards of shareholder capital. If we accomplish the goals we set out at investor day, we believe the company will become an even more valuable enterprise to our owners and our society. We are interested in your questions this morning. As usual, there will be one question per person so we can speak with as many of you as possible. I will turn this call back now to the moderator for your questions.

We thank you for joining us today.

Speaker 6

At this time, we will proceed with the question and answer period. We ask those with questions to limit to one question per person so we can get to as many participants as possible. In order to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. We request that you do not utilize a speakerphone or headset when asking a question. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Matthew Voorsch with Goldman Sachs.

Speaker 0

Yes. Hi. Good morning. I wanted to just ask about the moving parts in the quarter on medical trend, and in particular, it looks like you had a significantly favorable variance on the public sector side if we infer that correctly. Can you talk to that and how much was Medicare Advantage versus Medicaid versus Part D?

Speaker 3

Yeah. Matt, as you can appreciate, we addressed more of this on a broad basis for UnitedHealthcare, but maybe Dan, you want to respond to that?

Speaker 5

Good morning, Matt. This is Dan.

Speaker 0

Morning, Dan.

Speaker 5

First, in terms of the quarter, we are obviously very pleased with the performance, and I guess I would probably talk to it in terms of the medical loss ratio. Our loss ratio across UnitedHealthcare was up, but it was better than our expectation that we laid out at investor day. As you look at the commercial business, we saw an increase in our loss ratio, and that was largely due to less favorable development on a year-over-year basis, plus also the incorporation of premium rebates under reform. I think it's important to remember on the commercial side in particular, we had very low comparison periods in 2010 in the third and fourth quarter in particular. On the government side of the business, we saw a reduction in our loss ratio year over year, and that reduction was largely due to more favorable development on a year-over-year basis.

Speaker 0

Got it. On the commercial trend, did that still come in at about 5.5% for 2011, and can you just give us the reference point for what it was for 2010?

Speaker 5

From a trend perspective, it came in generally where we had expected at around 5.5%, and it was lower in 2010.

Speaker 0

Okay, thank you.

Speaker 6

Our next question comes on the line of Gail Boudreaux with Credit Suisse.

Speaker 8

Thanks. Good morning. I'd love to get your view on a big-picture question that wasn't addressed very much by the suite generally or your investors, and that is on bundled payments for Medicare. It seems like there's been a tremendous amount of interest by the industry, and I'm just wondering how we should think about the impact to UnitedHealth Group of the adoption of bundled payments by Medicare. For example, in the Optum products that you sell that enable bundled payments and any pickup in demand you're seeing, but also what it means for your Medicare Advantage and potentially your commercial business if providers do embrace bundled payments for Medicare.

Speaker 3

I think we think about this broadly in the category of kind of changing our approach to payments. It's performance-based. It is basically any of the variations that we see that are different than a, let's say, a fee-for-service approach. We approach it and have been for some time in UnitedHealthcare in terms of how we have been driving performance-based relationships and contracts. As you know, over the last probably a better part of two years, beginning to work with the delivery community in terms of enabling them to begin to ready themselves and engage in a way that they can effectively use these kind of payment methodologies in the conduct of their own business. I'll start with Gail with respect to the UnitedHealthcare side, and then I might ask somebody from Optum to respond to how we're working on the delivery side.

Speaker 1

Good morning, Charles. It's Gail Boudreaux. I think Steve hit it. As we think about bundled payments or all ways we're going to compensate physicians in the future and delivery systems, we're looking at a broad spectrum. Today, we have everything from fee-for-service to full capitation. We're experimenting with different bundled payments already in both our commercial and our Medicare business. I think it's right now a bit early for us to comment on the full adoption of that, but we think two things are going to be really important. One, clinical integration, in addition to the payment methodology, is going to drive our performance in terms of bringing overall costs and quality. At this stage, getting the bundles right is really important and aligning those bundles appropriately to the right incentives and our clinical programs.

Those would be the two things, but we have a number of pilots in place already around bundles, and it's a bit early but encouraging.

Speaker 8

The CBO suggested a 10% savings on a certain cardio-related procedure from bundled payment models. Can you share any experience you've had with what % savings we might expect on unit cost from the adoption of bundles?

Speaker 1

Charles, I think that was a very specific test run, and I think it's a bit early for us to be declaring savings. We think in cardiac and oncology, we're seeing some interesting results around oncology bundles. In particular, we rolled out a payment methodology there last year, again, fairly early, but I don't know that we yet declare on what we think the total savings would be because it's not just about the bundles. I think it's about the integration of care, the incentives, and the plan design. There are a whole number of other factors that come into play, and we see that both in our commercial business as well as our Medicare Advantage business.

Speaker 3

I would expect it's going to run a wide range across the spectrum of service lines. How about on the Optum side?

Speaker 4

Charles, it's Larry Renfro. In general, I agree with everything that both Gail and Steve have said. We're, as you know, pursuing this in our delivery system. I might ask Dawn Owens to comment on this one more specifically.

Speaker 7

Sure. If you think about the role that we've had with respect to bundled payment models, there have really been two areas. One, in our specialty network solutions where there are categories of clinical care that are high cost, high variation, and where we work with the care provider community already today to create bundled payment models for those services. Transplant is a really nice example of that, where it's a lot less about the unit cost but more about the total cost of care, alignment to quality to protocols, and so forth, where we deliver strong returns for patients and the system overall. Obviously, it's also a really important piece of the work we're doing in partnership with the delivery system in our collaborative care business where we're taking total cost and total quality responsibility for the patient populations that we're serving.

That's in Medicare but also in commercial models as well. Learning which models and which markets work most effectively, and as Gail Boudreaux said, there are lots of factors and dynamics that come into play to create a successful model on that front.

Speaker 3

I might just end by saying, you know, broadly, we see the benefit of a variety of different alternative payment approaches to the marketplace. You recognize that it is a widely ranging marketplace, and as a result, these approaches are going to vary significantly. Over the course of time, we're committed to changing the way healthcare is paid. We do believe these approaches will produce better outcomes, better use of resources, and will be better for healthcare, and we're going to be committed to doing our part along those lines. Next question, please.

Speaker 6

Our next question comes on the line of Josh Raskin with Barclays.

Speaker 5

Hi. Thanks, Eric. Good morning. Just getting back to the MLR differences, I think we calculated what you call non-commercial, all other, and acknowledging there's a lot in there. We had those up somewhere around 50 basis points for the first three quarters and then down almost 110 basis points, and that translates into almost $200 million of sort of change in cost. I think Dan said earlier that that was mostly due to changes in favorable development. Should we assume that the change in the non-commercial business was driven by a $200 million swing in development, and any color on whether that was Medicare Advantage or Medicaid or even MedSup or Part D would be helpful?

Speaker 3

I think Dan's going to kind of be restating what he said before, but I also don't think we're going to get into specific math in this kind of environment.

Speaker 5

Sure. Josh, it's Dan. We saw favorable development in all three of our UnitedHealthcare businesses in the fourth quarter and on the full year. In the fourth quarter of this year, it was more weighted towards our government programs, and in the fourth quarter of last year, it was more weighted towards our commercial businesses. That's what I'd say with respect to kind of where it's falling along the business continuum inside of UnitedHealthcare. Okay. Maybe I can ask a different question then. I'm sorry. Can you talk a little bit about hospital unit pricing and contracting and any changes? A couple of your peers last quarter stated that they were seeing some change in some of those trends. I'm just curious if you're seeing any differences in the actual unit cost on the hospital side.

Speaker 3

Josh, it's Dan again. On the unit cost side, it continues to be the most significant driver of our trend. It is an area of intense pressure and intense focus for us as a business, and I would say that's been relatively consistent. Underneath that, the inpatient setting is the most pronounced.

Speaker 5

No change.

Speaker 3

No fundamental change. It continues to be a pressure point for us.

Speaker 5

Okay. Thanks.

Speaker 3

Go ahead.

Speaker 5

Next question, please.

Speaker 6

Our next question comes from the line of Tom Carroll with Stifel.

Speaker 2

Good morning. Just in looking over your fully insured commercial enrollment for the last few years and then also taking into account the prepared remarks on your enrollment this year, do you think that the economy is having less of an impact on employer health benefit decisions than, say, a couple of years ago? Maybe said differently, as the economy, is it perhaps improving and employers are not being as restrictive on their health benefit plans as perhaps they were back then?

Speaker 1

In terms of the economy, I don't think that the economy per se has had an impact on the restrictiveness of employers and their offering of benefits. What we are seeing, though, is employers are very focused around value-based benefit designs, things that encourage health and wellness, trying to get real value out of the plans that they put in place. We've seen significant interest in the narrow network value-based offerings that we put in the market. As we look at our growth, particularly in the fully insured side, that's where we've seen a pretty significant uptake. Consumer-based health plans have also done very well in this marketplace. Plans that have more consumer responsibility and transparency are selling really well, and I think employers want to see consumers engaged in health and getting value for it as well as the money that they put in.

That's really probably the bigger shift than employers fundamentally changing their perspective based on the economy.

Speaker 8

Great. Thanks.

Speaker 6

Our next question comes from the line of John Rex with JPMorgan.

Speaker 5

Thanks. Just turning to the Optum unit here. Back at investor day, you talked about a doubling of the ROC, I think, from that unit over the next five years, I think between now and 2015. You also kind of repositioned it, breaking it down into eight different markets. What I wanted to get is kind of a flavor, as you think about that growth trajectory. If I took those eight markets that you were looking at at investor day, can you spike out, if I take it down to the market segment instead of the way it's configured right now, can you spike out the two or three that would be the biggest contributors to that doubling?

Speaker 3

Larry, do you want to comment?

Speaker 4

John, it's Larry. I'm going to start, and then I'm going to have John Prince kind of pick this up and maybe go a little bit broader than the question that you asked. If you look at what we're trying to do from now until 2015, it's kind of two key areas of focus. One would be our fundamental execution, and second would be strengthening of our, what I'd call strengthening and deepening our overall leadership team. It'll kind of all play to those eight markets that I will let John get into in a second. If you bear with me a minute, I think it's worth talking about this. If you looked at the key indicators for us and what I think you ought to look at us in accomplishing over the next few years to 2015, there's really four areas you might look at as indicators.

One would be organic growth, of which we had double-digit growth in 2011. Two would be our development of health IT. Three would be the development of clinical services. Four would be our PBM insourcing. We believe we're in the right markets, and they're large, and they're growing, and we believe that we're getting great market response. Those are four key areas that I think from an indication standpoint from now until 2015 you want to pay some attention to. The key to our investments or return from the standpoint of acquisitions, I might take a moment and just give you an example, a model that we're following, and you can kind of take a look at that model and understand where we're kind of going.

If you look at Optum Insight and how we in 2009 and 2010, how we were really making significant investments in building out that platform. In 2011, we didn't do any acquisitions on purpose. We focused on integrating, and we focused on growth. The results from doing that, the top-line growth is double-digit. Our margin has gone up 2% from 12% to 14%, and we expect that to continue from 2012 and beyond. Both the continued margin growth as well as the top-line growth. If you apply that same model across the Optum Health and Optum Rx, that's kind of the discipline that we're employing to really get to that 2015. I think you got to look at that model, but you can also look at the four areas that we need to focus on in terms of the true fundamental execution.

I don't know, John, do you have any final?

Speaker 8

Sorry. I just build on that, Larry. I think, as Larry mentioned, of the eight markets, we're in the right markets. They're large and they're growing. We're getting good market response for all of them. The key focus areas, as he mentioned, were the organic growth, health information technology, clinical services, analytics, and the PBM markets. I think we're in the right markets. We're growing in those markets, and you got two effects. One, we're growing the top line, and you already see that in our numbers across the board, which is 70% of our numbers year over year is actually organic growth. You have a strong organic growth story. As we get to scale, you'll see the second piece, which is our margins expanding.

I think you're going to see that in our various businesses, and I think Larry highlighted the story in Optum Insight, which is going from 12% to 14%, and we're expecting that to advance next year and get everybody to our long-term guidance, which we've stated at investor day and continually.

Speaker 3

Okay. Thanks. Next question, please.

Speaker 6

Our next question comes from the line of Sarah James with Wedbush.

Speaker 2

Thank you. I had a question on Optum Rx specifically. I wanted to see if there was any update on the response that you've been getting from employers, any feedback they've been providing, or any update on RFPs that you were looking at this year. Going back to the prepared comments on revenue growth driven by higher revenue, especially pharmaceuticals, if you could just speak to the size of the growth opportunity that you see there for the mid and long term.

Speaker 3

I think we will broadly, you know, we won't comment on customers or specifics along those lines, never have. Beyond that, I think we can respond more broadly, Dirk.

Speaker 2

I think we have good relationships with consultants in a national account space. We're going to leverage those to continue to gain access to sales. We have a really good, we're building our administrative platform and infrastructure. We think that'll improve our future competitiveness. We're working hard on our value proposition, which we talked about at investor day. It's all about improving total cost and quality by optimizing across medical and pharmacy. We grew a lot last year.

Speaker 3

$2 million, right?

Speaker 2

Yeah, 2.1 million members and 767,000 of those were external.

Speaker 3

I think the response in terms of the marketplace is that there is an appetite for a new, more innovative competitor in that marketplace, and I think we're in the mix on all the RFP activity, right?

Speaker 2

Yep. We're definitely in the mix. Okay. Thank you. Just on the specialty pharmacy growth opportunity for the mid and long term.

Speaker 3

I have read a bunch of stuff and looked at some of the projections. Probably 40% of the drug spend by 2014 across medical and specialty, across medical and pharmacy benefits will be specialty drugs. We think we're well positioned for that market, specifically in the area of our clinical programs and our ability to handle and monitor the use of those drugs. I think we're very well positioned to participate in the growth of the specialty market.

Speaker 2

We do all our specialty. Larry, you want to comment?

Speaker 4

I just wanted to make an additional comment on what Dirk said earlier. When we began the year this year, we decided to put an announcement out of the Optum leadership team. In putting that announcement out, one of the areas and people that we wanted to bring over and to strengthen and deepen the organization was a person by the name of Michael Matteo. Michael is the head of UnitedHealthcare's national accounts, or he was the head of UnitedHealthcare's national accounts prior to this move. He's moving into Optum to be the Chief Growth Officer. Michael's background, you know, he has tremendous relationships both internally and externally. He's been experienced in business growth, business expansion, as well as executive sales leadership. Michael's going to be working with Optum Rx and Dirk's team to really put together a robust sales plan.

I just wanted to comment on Michael so that you would get his name. I don't know, Gail, if you have any thoughts on Michael.

Speaker 1

Thanks, Larry. I just add that we've had a tremendous growth trajectory in our national accounts business, and I think Mike, from our perspective, brings that skill to the pharmacy business. We think it will be a great addition to Larry's team, and we have a very strong bench, so it's a good move.

Speaker 3

Thank you. Next question.

Speaker 6

Next question comes from the line of Christine Arnold with Cowen.

Speaker 8

Good morning. You talked about provider steerage and bundling in the narrow network products. A couple of questions there. Could you tell us how much of your membership on the commercial side is in these narrow network products and your expectations there? Could you also put some meat on the bones in terms of your ability to steer volume to more efficient providers? For example, X% of our hospitals are considered high performance and they get Y% of our volume or the same kind of metric on the doctor side.

Speaker 3

Yeah, I think we can respond to that, Gail.

Speaker 1

Christine, let me take it in a few parts because I think you have a couple of different questions embedded in there. First, in terms of the value-based product, roughly 15%, a little bit less of our membership right now is in value-based type products, and that is an area that continues to grow, as I mentioned at the beginning of my comment. In terms of the, I think, your second question related to steerage to high-performing hospitals and physicians, let me sort of step you back. We've had a premium designation in place for a number of years, and we originally began to introduce that to the marketplace in terms of just cost and quality and information and transparency.

Over the last several years, we've begun to build that into our basic design of our networks, whereas before it was available, it is still available to everyone, but we've also now embedded it in our networks. That's part of that 15% of members that come through that, but everyone has access to those premium designated physicians. In terms of our pay for performance on the hospital side, that's an area that's growing. What I shared with you at investor day was that we are taking our premium increases and putting those into, or rather, our rate increases and putting those into pay for performance. That's how facilities earn a base rate, and then they earn their incentive based on a very specific set of outcomes that we work with them on based on the facility, but on a universe of probably 10 standard areas.

For example, reduction in readmission rates, improvement in overall quality scores, things of that nature. From that perspective, the percentage there is roughly about 12% to 15% of spend would go through that model.

Speaker 8

If you think about how much these narrow network membership and the steerage is going to change, I mean, presumably you're steering to the lower cost, higher quality, more efficient providers, and that lowers overall trend. If you think about all these factors together, is your hospital pricing in 2012, ignoring utilization because it's always a question what's going to happen there, but is your hospital pricing decelerating in 2012 relative to 2011, and what did it do in 2011 versus 2010?

Speaker 1

I think Dan addressed that when he talked about trend. There is still significant pressure on unit cost at the hospital level, and year over year, that's one of the most significant issues in our trend. That is one of the reasons we're trying to shift the overall distribution of unit costs to more pay for performance. In 2011 and 2012, when you look at the details of our trend buildup, unit costs at the inpatient hospital side are still significant.

Speaker 8

You expect the unit cost to increase on the hospital side, and that drives the increase in 2012 medical trends?

Speaker 1

We expect it to be stable year over year in terms of the % increase.

Speaker 8

Okay, perfect. Thanks.

Speaker 3

I just comment one thing about the term steerage. I think it's important to recognize that the products that are really moving into the marketplace today are enabled, and one of the reasons I think they're getting traction is because they're enabled by much better information. They're enabled by much better, more personalized technology. As a result, the consumers are actually in a position of making an assessment, being able to make a choice. It is less steerage. It is more about providing information, aligning incentives, and that works on both the consumer side and the care provider side to make the marketplace more efficient. I think that is why you're seeing that kind of performance across those products.

You get great outcomes, you get high-quality access, and you get the opportunity to get in more control of your health and manage the economics because of the tools and the designs that are now in the marketplace. I think that's fundamentally different than what I would call the historic notion of steerage.

Speaker 1

The only thing I'd add to Steve's comment, as you know, we launched the treatment cost estimator tool. We showed that, I think we shared that tool on Investor Day. It is now available to our members, and it does provide much greater transparency for consumers to take control of that decision and have a real understanding of cost and quality among providers and plans. I think that is having a big impact in the market as well.

Speaker 6

Our next question comes from the line of Peter Costa with Wells Fargo.

Speaker 8

Good morning. I can see the commercial MLR in the fourth quarter was better than you thought it would be back in November based on your full-year guidance, but I'd still like to explore the 190 basis point increase year over year. If you could kind of comment on how much of that is tied to sort of medical trend versus pricing as opposed to how much is due to PPD last year. You said that there was more in the commercial side a year ago, how much is due to rebates this year? Also, and perhaps most importantly from my perspective, how much is due to the sort of increased seasonality of the business from higher deductible health plans, and how will that change in 2012?

Speaker 3

Touch them all. Dan, go through it.

Speaker 5

Peter, how about this? I'll rank them for you in terms of contribution to increase year over year. The first is favorable development, so the change in that on a year-over-year basis. The second is the introduction of the premium rebates, and then the balance is that relativity between yield and trend.

Speaker 8

What about seasonality in terms of the change from more people in higher deductible plans? You know that changes the seasonality of your costs from Q1 to Q4?

Speaker 5

The seasonality was pretty stable on a year-over-year basis. The challenge is you don't see it because the baseline was so low in 2010 when you compare it.

Speaker 8

Got it. Thank you very much.

Speaker 3

Thank you. Next question, please.

Speaker 6

Our next question comes from the line of Justin Lake with UBS.

Speaker 2

Thanks. Good morning. I wanted to follow up on the questions around Optum and that expectation of return on invested capital, you know, nearly doubling over the next three years. Just from a timing perspective first, do you expect that to, you know, be fairly ratable between 2012 and 2015, or do you expect that to be more heavily weighted early on versus later or vice versa?

Speaker 3

I'll have Larry answer this because it'll tie into elements of what he had just said. My expectation is that it is going to be a steady acceleration where we'll continue to, I mean, the framework I think you should bear in mind, and I think Optum Insight is a good example of it, is that we're building these businesses, and as we build them, they become more integrated, more mature. The expectation for margin expansion is established. The cost of building these becomes less, and the profitability reveals itself. Larry?

Speaker 4

Yeah. I think, you know, I'm going to go back, and I'll probably be doing this many times over the next few quarters to those four elements. I think if we focus on, or if you are looking at this from an organic growth standpoint, what we're doing in the developing of health IT and clinical services, as well as the program with our insourcing of the PBM, I think those are very strong elements for you to pay attention to. I think in addition to that, just so you know, that we're operating off of a five-year plan. When we're walking through this, you know, obviously there are changes that you have to make based on changes in the market, but I think we believe that we have a very strong start to 2012. We'll see solid performance, but we'll be able to measure that.

I would also go back to what we talked about with Optum Insight because that answers the questions around acquisitions. It's a model that we're going to have a strong, strong discipline around in terms of making sure that we have selected capabilities that we're looking at, and we kind of have a strategy of build, partner, or invest, and we're going to have a strong, strong discipline around that. I do believe this will give you line of sight into some of the things that we're doing, and we'll be developing this and talking about it over the next quarters.

Speaker 3

Okay. I think it's kind of important to recognize that I think this is principally around execution. We're in the right markets. The businesses are well positioned in those markets. We brought additional resources to bear, and this really is a function of execution over the next couple of years, right?

Speaker 4

Right.

Speaker 2

Just a quick follow-up on M&A, as you mentioned. When I look over the last couple of years, you've spent, if I include Excel Health, probably in the neighborhood of $5 billion or nearly 10% of your market cap on acquisitions, and there hasn't been a ton of visibility in terms of the levels of accretion or expected performance from an earnings benefit perspective. Is there any way you can help us flush that out given the significance there in terms of what that's going to add from an earnings perspective over the next couple of years?

Speaker 3

Yeah. Justin, I don't know how to respond to that because we'd have to basically begin the process of almost reviewing acquisition by acquisition with you. I think we'll try to do that as we discuss these results. I would say that I think Excel Health will be more on the benefit side than it will be on the services side. I think maybe the best way to do that will be to maybe discuss our kind of return on invested capital in more depth with you in future settings, but we're really not prepared to discuss it today. I do think the acquisitions that have been made have been very prominent in terms of the growth of the Optum businesses, and I would say that we're very pleased with all of the acquisitions that we made, and I'll just leave it at that.

Speaker 2

Great. Thanks.

Speaker 6

Our next question comes from the line of Carl McDonald with Citi.

Speaker 8

In the commercial business, after you allocate for favorable development, can you talk about how the trend changed over the course of the year relative to the 5.5% trend for the full year? Basically, what I'm trying to get at is as we exit 2011, are you at that 5.5% trend now, or do you think you're closer to the 6%, 6.5% trend that you're assuming for 2012?

Speaker 5

Carl, it's Dan Schumacher. The trend in the commercial business increased progressively through the quarters of the year, and it was more pronounced in the third and the fourth quarters, in particular because of that low baseline in 2010. In terms of where we're operating at today, 5.5% is reasonable.

Speaker 3

Great, thank you. I think we perhaps only have time for maybe one question or so. Next, please.

Speaker 6

Our next question comes from the line of Doug Simpson with Morgan Stanley.

Speaker 8

Thanks. I appreciate you taking my question. Steve, could you just talk a little bit about the duals, how you guys are thinking about that in terms of timing and potential investment around that, and maybe just remind us sort of the states of most interest to you and the ability to scale the capabilities you all have into those different markets, talking about the CADE footprint, the SNPs, that kind of thing?

Speaker 3

Sure. I would suggest I'll have Gail, and then I think that will probably run through a couple of our other parties here today. I would suggest this is not new for us. This is an area we have been focusing on for some time, even dating back to the Evercare business, the Inspiris business, etc. This has been a market segment that we've recognized is a need of management, has significant cost, has significant challenges. We've been building these capabilities for some time and already have a pretty good base of business. This is really just emerging more in a more national profile, particularly from a policy point of view about just what the challenges really are in these businesses. I think we're really well positioned, and Excel Health gives us a great position in that.

In terms of you can come at this from two directions, the Medicare direction and the Medicaid direction. We are somewhat indifferent and expect that different approaches will be taken at different markets. That's why maybe, Gail, if you want to pick it up from those two sides.

Speaker 1

Sure. I think Steve hit the major points. One, as we mentioned at our investor conference and in our breakout sessions, we do see it as a major opportunity. We think we're uniquely positioned because we have significant presence in both the Medicaid and Medicare space. We've been at this business for a long time. We have experience in managing clinically complex and long-term care populations, and Excel Health brings some additional capability to us, which I think will be really important. I think experience and the depth of experience that we have really matters in this market. Not a whole lot's changed since we met in New York in terms of the timing of what is happening. We are engaged. I might ask Jack Larsen, who leads our Medicaid business, to maybe comment a little bit about what we're seeing in the states in particular.

Speaker 3

Hey, Doug. Jack Larsen. I think Gail said it right. Not much on the surface has changed in terms of having a different point of view on timing. CMS and a number of the 37 states who had submitted letters of intent are collaborating towards CMS's published goal of 1 million individuals in fully integrated programs by January of 2013. I guess where we're at, we think all these states that have shown interest have interesting aspects where we could perhaps add value.

We continue to work with states where we participate in the underlying Medicaid programs and offer dual special needs plans, as well as other states where we don't have as developed a presence, and really trying to work with them as they develop their own unique approaches as to how they're going to get after the integrated Medicare and Medicaid cost structure, which is just an extraordinary opportunity that I think I shared with you in New York in December. Thank you. I think in terms of time, we are going to need to close this. Again, we thank you for joining us on the call today. We hope what you heard is that our heads are totally into the game for 2012. We intend to serve people well.

We intend to elevate our performance even further this year, and we will keep building and growing our businesses and our capabilities for both benefits and for services. We look forward to speaking with you again next quarter. Thank you.

Speaker 6

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.